Investment Mortgages

Posted on: 09 September 2008 by Gareth Hargreaves

The fundamentals to consider when looking to raise money for property investment.

As most of us are aware over the last 12 months the 'credit crunch' has radically affected the way we view the mortgage market, and more particularly many of us have been adversely affected by the tighter lending terms and criteria imposed upon us.

Whilst I hope that I have not spoken too soon the recent easing in the mortgage market is at least a move in the right direction towards re-establishing some form of 'normality'.

However, almost regardless of the events of the last year many of the principles of borrowing for property investment still hold true and that is what I aim to focus on in this article.

Whether you are purchasing overseas property purely for investment or buying a holiday home, mortgages are now available in numerous corners of the world.  

Whilst there remain many countries where it is currently not possible to arrange a mortgage in the local currency, there are now many countries with either established, or developing, mortgage products and markets.  Over time this will change and many more countries will come on stream with mortgages.

The Power Of Leveraging

The advantage of an overseas mortgage, just like a UK mortgage, is that it allows you to use ‘other peoples’ money’, namely the banks’, to gear your property purchase and reduce your financial input.

By leveraging your investment, and assuming property prices continue to rise, you have the potential of limiting your own cash investment, whilst optimising the return on your cash investment.

Let’s use an example where you leverage £30,000 to purchase a £100,000 investment property - in other words, borrow the remaining £70,000 from the bank.  We will also assume that the property value only increases at a modest five per cent per annum for the next 10 years:

Year Property Value Mortgage Equity
Now £100,000  £70,000 £30,000
Year 5 £127,627 £70,000  £57,627
Year 10 £162,886 £70,000 £92,886

So you make 5 per cent increase on the full value of the property, not just the £30,000 which you initially deposited.  In this example your £30,000 is worth £57,627 in five years and £92,886 after 10 years.  This is the power of leveraging.

In effect you have increased your initial property investment 3 fold in 10 years!  Now imagine how much profit you would have made if the market increased by 10 per cent per annum.  To save you working it out, your £30,000 would be worth £189,374 after 10 years, more than a six fold increase.

It should be pointed out that the downside is that if property prices fall, you would have an amplified loss of your initial investment.  However, over the medium to long term, property prices have traditionally out-performed most other investment types, such as stocks and shares.

Over a period of time, using leverage to good effect and using all the other skills you need when buying property, property is by far the best investment for the majority of individuals.

Borrow In The UK Or Overseas?

When buying property overseas it is generally recommended that you borrow in the country where you purchase a property.

This is primarily to avoid the risk of adverse currency fluctuations eroding any profits you may have made as the property value increases.  For instance, let's assume you borrow funds in sterling, in the UK, using equity drawdown from your main home to purchase a property in France.  

We will also assume that property values rise 5 per cent over a 12-month period.  However if the pound strengthened against the Euro by 5 per cent over the same length of time it would effectively cancel out any gain in value in the property.

Going one stage further you would probably be expecting the rent received in France to pay towards your additional borrowing in the UK.  Using the above example, if the pound strengthened by five per cent against the Euro, your Euro rent would be converted to sterling at 5 per cent less than when you originally purchased the property. 

By arranging a mortgage in the local currency you would remove the risk of currency fluctuations adversely affecting your position.

However, it should be noted that interest rates on mortgages in some countries, particularly those with less developed mortgage markets can be in the region of 8 to 10 per cent per annum.  In this instance, a purchaser may decide that they would prefer to borrow against assets in the UK, at a much lower interest rate and take the risk of currency fluctuations - although these can be limited by forward buying your currency.

In more mature property markets, such as Western Europe and the USA, interest rates are generally similar to, or lower than, those in the UK.

The decision on which country to raise finance in will be an individual decision based entirely on your personal circumstances.

Overseas Mortgages

For over a decade there has been increasing demand for overseas property and more overseas markets to invest in.

When investing abroad however, there are many factors to consider, including the prevailing regulation in different territories, different regimes or customs for raising finance and currency fluctuations, to name but a few.

It is therefore essential to obtain skilled and qualified advice to minimise risks and maximise returns.

Overseas Mortgage Specialists

Principal International is now working alongside an overseas property finance specialist which is able to arrange mortgages in over 40 countries, with competitive interest rates and exclusive terms.

They offer independent and impartial advice - including legal and tax advisory services - to clients seeking to purchase property abroad, whether it is for investment, personal residential purposes or both.

If you would like further information please contact Principal International on 00 44 (0) 1483 748629 who would be pleased to assist you.

By Derick Ivimy

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